Todd Pedersen
, CEO of
APX Group
, commented, “We’re pleased with our progress during the first quarter from both a financial and operational perspective. We reported 17.8% year-over-year total revenues growth, and at the same time increased our Adjusted EBITDA, while continuing to invest in our technology and smart home capabilities. As planned, we began the rollout of Vivint Flex Pay in partnership with
Citizens Bank
during the first quarter and we announced on
May 4, 2017
, a retail national partnership with
Best Buy
(NYSE: BBY) to offer our smart home products and services in
Best Buy
stores.” Mr. Pedersen continued, “While we have a lot of work ahead of us, we’re looking forward to a successful 2017.”

Revenue and Subscriber Data

APX Group
reported total revenues of
$205.4 million
for the three month period ended
March 31, 2017
, an increase of 17.8%, as compared to the same period in 2016. The increase in total revenues of
$31.1 million
was primarily driven through an increase in recurring and other revenue of
$29.5 million
. Recurring and other revenue increased
$21.4 million
year-over-year through an increase of approximately 133,000 Total Subscribers, while higher ARPU drove
$7.1 million
of the recurring and other revenue increase versus the same period in 2016.

The Company added 39,292 net new smart home subscribers during the first quarter of 2017. The Company’s inside sales channel increased originations by 9.1% to 24,498 net new smart home subscribers in the three months ended
March 31, 2017
, as compared to the same period in 2016. Average Revenue per New User for the three months ended
March 31, 2017
increased by
$5.98
, from
$62.01 to $67.99
, compared to the same period in 2016.

Summary of Financial and Portfolio Metrics for the Last Five Quarters

($ in millions, except for subscriber data)

March 31,

2016

June 30,

2016

September 30,

2016

December 31,

2016

March 31,

2017

Total Revenues

$

174.3

$

180.8

$

198.3

$

204.5

$

205.4

Net Loss

$

(45.1

)

$

(89.7

)

$

(70.0

)

$

(71.2

)

$

(82.6

)

Adjusted EBITDA

$

102.8

$

105.0

$

118.0

$

118.3

$

115.4

Adj EBITDA Margin

59.0

%

58.1

%

59.5

%

57.8

%

56.2

%

Total RPU(1)

$

56.3

$

61.2

$

65.3

$

65.6

$

66.2

Net New Smart Home Subscribers

41,830

101,334

94,272

39,805

39,292

Average Revenue per New User(1)

$

62.01

$

67.08

$

68.85

$

66.33

$

67.99

Total Subscribers(1)

1,018,397

1,088,909

1,142,571

1,146,746

1,151,453

Average Revenue per User(1)

$

55.27

$

56.20

$

57.16

$

57.23

$

57.49

Subscriber Account Attrition(2)

12.6

%

12.9

%

12.9

%

12.6

%

12.0

%

(1) Total Subscribers and RPU data exclude wireless internet business and are provided as of each period end

(2) Subscriber attrition is reported on an LTM basis for each period end and excludes wireless Internet business

APX Group CFO
Mark Davies
commented, “We had a two-fold focus during the first quarter of 2017: First, drive improvements in our operating metrics, which we did with strong revenue growth, in particular through our inside sales channel, a reduction in our subscriber acquisition cost multiple, a significant year-over-year increase in Average Revenue per New User and an improvement in customer attrition. Second, execute on our IT and infrastructure improvements related to an SAP enterprise resource planning system implementation, and the process changes and system buildouts to facilitate the launch of Vivint Flex Pay, both of which had successful initial rollouts.” Mr. Davies added, “We also successfully completed a
$300 million
aggregate principal amount bond offering, which was met with strong investor reception. In summary, we believe we’re off to a good start to the year.”

Costs and Expenses

Operating expenses for the first quarter of 2017 increased by 23.1%, from
$58.0 million
in the first quarter of 2016 to
$71.4 million
. The
$13.4 million
increase in operating expenses was primarily due to an increase of
$7.4 million
in personnel and related costs,
$3.3 million
of equipment costs and
$2.1 million
for contracted services and information technology costs to support the growth in the Total Subscribers. The
$3.3 million
of equipment costs includes approximately
$1.8 million
of equipment cost related to the upgrading of customers’ cellular radios from 2G to 3G and certain other updates to their systems to support the change in technology.

Selling expenses, net of capitalized subscriber acquisition costs, for the first quarter of 2017, were
$34.8 million
compared to
$28.9 million
for the same period in 2016. The 20.4% year-over-year increase in selling expenses primarily attributable to
$4.0
of personnel and related costs,
$0.8 million
of lead generation costs associated with growth in the inside sales new subscriber originations and
$0.7 million
in information technology costs related to rolling out new iPads and credit card reader devices for the direct-to-home sales representatives to use with the Vivint Flex Pay program.

General and administrative (“G&A”) expenses, net of allocations, for the first quarter of 2017 were
$38.9 million
compared to
$30.4 million
for the first quarter of 2016. The year-over-year increase of
$8.5 million
was primarily due to an increase of
$3.6 million
in personnel and related costs,
$1.2 million
for marketing expenses,
$0.7 million
of information technology costs and
$0.7 million
of bad debt expenses.

Adjusted EBITDA and Net Loss

Adjusted EBITDA for the first quarter of 2017 grew by 12.3% to
$115.4 million
on a net loss of
$82.6 million
, compared to Adjusted EBITDA of
$102.8 million
on a net loss of
$45.1 million
for the first quarter of 2016.

Recent Developments

Vivint Flex Pay Plan

On
January 3, 2017
, we announced the introduction of the Vivint Flex Pay program which is expected to be our primary sales and pricing model going forward. Under the Vivint Flex Pay plan, we launched two new financing programs: (1) a consumer financing program with
Citizens Bank, N.A.
, in the first quarter of 2017, offering qualified customers in
the United States
an opportunity to finance the purchase of products and related installation used in connection with Vivint’s smart home and security services and (2) a retail installment contract program ("RIC") funded by Vivint, with respect to the purchase of products and related installation to certain customers who do not qualify to participate in the
Citizens Bank, N.A.
consumer financing program, but qualify under our historical underwriting criteria. We may also establish credit programs either directly or through an affiliate or pursuant to an agreement with a third party to provide installment loans or similar products to customers that do not qualify to participate in the consumer financing program. Alternatively, customers may purchase the products and related installation at the outset of the service contract with cash or credit card.

With the Vivint Flex Pay plan, customers pay separately for the products and related installation and our service offerings. Under the consumer financing program, qualified customers are eligible for installment loans provided by a third party financing provider of up to
$4,000
for either 42 or 60 months. In connection with the consumer financing program, a subsidiary of ours entered into an agreement with
Citizens Bank, N.A.
pursuant to which Citizens will be the exclusive provider of installment loans under the consumer financing program for our customers who are eligible for such loans. Pursuant to the agreement with Citizens, we pay a monthly fee to Citizens based on the average daily outstanding balance of the loans provided by Citizens and we share with Citizens liability for credit losses, with Vivint being responsible for approximately 5% to 100% of lost principal balances, depending on factors specified in the agreement. The initial term of the agreement is five years, subject to automatic, one-year renewals unless terminated by either party in accordance with its terms. We are initially offering RICs for 42 or 60 month terms to certain customers who do not qualify to participate in the consumer financing program, but qualify under our historical underwriting criteria, and may establish credit programs either directly or through an affiliate or pursuant to an agreement with a third party to provide installment loans or similar products to such customers.

Additional 2022 Notes

On
February 1, 2017
, APX issued and sold an additional
$300.0 million
aggregate principal amount of 7.875% senior secured notes due in 2022 at a price of 108.250%. A portion of the proceeds from the offering of these notes was used to redeem
$300.0 million
aggregate principal amount of the Company’s existing 6.375% senior secured notes due in 2019 and pay the related redemption premium, as well as to pay all fees and expenses related thereto and any remaining proceeds will be used for general corporate purposes.

Strategic Retail Partnership
with
Best Buy

On
May 4, 2017
, we announced that we have entered into a strategic partnership agreement with
Best Buy Stores, L.P.
, in which the parties will jointly market and sell smart home products and services. Under the terms of the agreement,
Best Buy
will offer certain Vivint smart home products and services in approximately 400
Best Buy
retail stores on or before the first anniversary date of the agreement, with a continuing rollout to a significant number of additional
Best Buy
stores by the second anniversary date of the Agreement expected. We expect that
Best Buy
will begin offering Vivint’s products in services in these stores in the second or third quarter of 2017. The agreement also contains certain exclusivity conditions to which the parties are subject. We expect to devote significant management attention as well as significant capital and other resources to our partnership with
Best Buy
over the course of the agreement. Historically, we have primarily originated subscribers through our direct-to-home and inside sales channels. There is no assurance that our retail partnership with
Best Buy
or other third-party distribution arrangements will become a significant source of subscriber originations or revenue for us. There is also no assurance that
Best Buy
will continue to distribute our products and services after the expiration or termination of the
Best Buy
agreement. If the
Best Buy
agreement expires or is terminated, or if
Best Buy
otherwise ceases to distribute our products and services, we may not be able to establish alternative retail distribution channels for our products and services.

Liquidity

As of
March 31, 2017
, the Company’s liquidity position on a consolidated basis, defined as cash on hand, short-term marketable securities and available borrowing capacity under the Company’s revolving credit facility, was approximately
$319 million
.

Certain Credit Statistics

Our net leverage ratio, defined as the ratio of net debt to LTM Adjusted EBITDA, was 5.4x at
March 31, 2017
.

Conference Call

Vivint Smart Home will host a conference call and webcast to discuss the quarterly results at
5:00 p.m. ET
today,
May 10, 2017
. To join the live webcast and conference call, please visit the investor relations section of the Vivint Smart Home website,
www.investors.vivint.com/events-presentations/events
or dial (877) 201-0168 for domestic participants or (647) 788-4901 for international participants with the conference code of 18107239.

A financial results presentation and online access to join the webcast will be available immediately before the call on the Investor Relations section of the Company’s website at
http://www.investors.vivint.com/events-presentations/events
. A replay of the webcast will be available for 30 days on the Investor Relations section of the Company’s website at
www.investors.vivint.com
following the completion of the webcast and conference call.

About Vivint Smart Home

Vivint Smart Home is a leading provider of smart home services in
North America
. Vivint delivers an integrated smart home system with in-home consultation, professional installation and support delivered by its Smart Home Pros, as well as 24/7 customer care and monitoring. Dedicated to redefining the home experience with intelligent products and services, Vivint serves more than one million customers throughout the U.S. and
Canada
. For more information, visit
www.vivint.com
.

Forward-Looking Statements

This earnings release and accompanying conference call include certain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including statements regarding, among other things, our plans, strategies and prospects, both business and financial, including without limitation with respect to the Vivint Flex Pay plan and our partnership with
Best Buy
. Forward-looking statements convey the Company’s current expectations or forecasts of future events. All statements contained in this earnings release other than statements of historical fact are forward-looking statements. These statements are based on the beliefs and assumptions of our management. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates” or “intends” or similar expressions.

Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of this date hereof. You should understand that the following important factors, in addition to those discussed in “Risk Factors” in our most recent annual report on Form 10-K, and other reports filed with the
Securities and Exchange Commission
(“SEC”), as such factors may be updated from time to time in our periodic filings with the
SEC
, which are available on the SEC’s website at
www.sec.gov
, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

risks of the smart home and security industry, including risks of and publicity surrounding the sales, subscriber origination and retention process;

the highly competitive nature of the smart home and security industry and product introductions and promotional activity by our competitors;

In addition, the origination and retention of new subscribers will depend on various factors, including, but not limited to, market availability, subscriber interest, the availability of suitable components, the negotiation of acceptable contract terms with subscribers, local permitting, licensing and regulatory compliance, and our ability to manage anticipated expansion and to hire, train and retain personnel, the financial viability of subscribers and general economic conditions.

These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this press release are more fully described in the “Risk Factors” section in our most recent annual report on Form 10-K, and other reports as such factors may be updated from time to time in our periodic filings with the
SEC
. These risk factors should not be construed as exhaustive. We undertake no obligations to update or revise publicly any forward-looking statements, whether a result of new information, future events, or otherwise, except as required by law.

Certain Definitions

Total Subscribers – The aggregate number of active smart home and security subscribers at the end of a given period

Monthly Revenue per User (“RPU”) – The recurring monthly revenue billed to a smart home and security subscriber

Total Revenue per User – The aggregate RPU billed for all smart home and security subscribers

Average RPU (“ARPU”) – The Total RPU divided by Total Subscribers

Average Revenue per New User (“ARPNU”) – The aggregate RPU for new subscribers originated during a period divided by the number of new subscribers originated during such period

Attrition – The aggregate number of canceled smart home and security subscribers during a period divided by the monthly weighted average number of total smart home and security subscribers for such period. Subscribers are considered canceled when they terminate in accordance with the terms of their contract, are terminated by us, or if payment from such subscribers is deemed uncollectible (when at least four monthly billings become past due). Sales of contracts to third parties, and certain moves and takeovers are excluded from the attrition calculation

Net Subscriber Acquisition Costs – Defined as direct and indirect costs to create a new smart home and security subscriber. These include commissions, equipment, installation, marketing and other allocations (G&A and overhead), less activation fees, installation fees and up sell revenue. These costs also exclude residuals and long-term equity expenses associated with the direct-to-home sales channel.

Net Subscriber Acquisition Multiple – Defined as Net Subscriber Acquisition Costs, divided by the number of net new subscribers originated, and then divided by the ARPNU

Last Quarter Annualized Adjusted EBITDA (“LQA Adjusted EBITDA”) – A common industry measure used to reflect the step-function in earnings during the sales season related to the subscribers generated from April to August. LQA Adjusted EBITDA, calculated by multiplying Adjusted EBITDA for the most recent fiscal quarter by 4, represents the ongoing earnings power of Vivint’s current subscriber base and is potentially a more relevant metric than LTM due to the recurring nature of the revenue and expected earnings.

Net Service Cost – Defined as total service costs, including monitoring, customer service, field service and other allocations (G&A and overhead) costs, less total service revenue divided by total service subscribers

Net Service Margin – Defined as ARPU per subscriber less Net Service Costs divided by ARPU

1
This earning release includes Adjusted EBITDA, a metric that is not calculated in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”). See the “Statement Regarding Non-GAAP Financial Measures” section at the end of this earnings release for the definition of Adjusted EBITDA and a reconciliation to its most directly comparable financial measure calculated in accordance with GAAP.

APX GROUP HOLDINGS, INC. and SUBSIDIARIES

Consolidated Statements of Operations

(In thousands)

(Unaudited)

Three Months Ended March 31,

2017

2016

Revenues:

Recurring and other revenue

$

196,858

$

167,446

Service and other sales revenue

5,391

5,011

Activation fees

3,104

1,796

Total revenues

205,353

174,253

Costs and expenses:

Operating expenses

71,352

57,991

Selling expenses

34,798

28,880

General and administrative expenses

38,861

30,441

Depreciation and amortization

76,869

60,571

Restructuring and asset impairment charges

-

45

Total costs and expenses

221,880

177,928

Loss from operations

(16,527

)

(3,675

)

Other expenses (income):

Interest expense

53,681

45,418

Interest income

(57

)

(12

)

Other loss (income), net

12,066

(5,108

)

Total other expenses

65,690

40,298

Loss before income taxes

(82,217

)

(43,973

)

Income tax expense

419

1,120

Net loss

$

(82,636

)

$

(45,093

)

APX GROUP HOLDINGS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

March 31,

December 31,

2017

2016

ASSETS

Current Assets:

Cash and cash equivalents

$

37,225

$

43,520

Accounts and notes receivable, net

11,759

12,891

Inventories

80,845

38,452

Prepaid expenses and other current assets

12,426

10,158

Total current assets

142,255

105,021

Property and equipment, net

67,258

63,626

Subscriber acquisition costs, net

1,064,050

1,052,434

Deferred financing costs, net

3,914

4,420

Intangible assets, net

450,788

475,392

Goodwill

835,491

835,233

Long-term investments and other assets, net

24,654

11,536

Total assets

$

2,588,410

$

2,547,662

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities:

Accounts payable

$

92,757

$

49,119

Accrued payroll and commissions

30,027

46,288

Accrued expenses and other current liabilities

87,322

34,265

Deferred revenue

48,820

45,722

Current portion of capital lease obligations

9,134

9,797

Total current liabilities

268,060

185,191

Notes payable, net

2,510,210

2,486,700

Capital lease obligations, net of current portion

6,039

7,935

Deferred revenue, net of current portion

73,715

58,734

Other long-term obligations

49,945

47,080

Deferred income tax liabilities

7,277

7,204

Total liabilities

2,915,246

2,792,844

Total stockholders’ deficit

(326,836

)

(245,182

)

Total liabilities and stockholders’ deficit

$

2,588,410

$

2,547,662

APX GROUP HOLDINGS, INC. and SUBSIDIARIES

Summary Cash Flow Data

(In thousands)

(Unaudited)

Three Months Ended March 31,

2017

2016

Net cash used in operating activities

$

(6,153

)

$

(12,505

)

Net cash used in investing activities

(8,036

)

(2,442

)

Net cash provided by financing activities

7,901

14,026

Effect of exchange rate changes on cash

(7

)

(1,126

)

Net decrease in cash

$

(6,295

)

$

(2,047

)

Cash:

Beginning of period

43,520

2,559

End of period

$

37,225

$

512

Statement Regarding Non-GAAP Financial Measures

Non-GAAP Financial Measures

This earnings release includes Adjusted EBITDA, which is a supplemental measure that is not required by, or presented in accordance with, accounting principles generally accepted in
the United States
(“GAAP”).

“Adjusted EBITDA” is defined as net income (loss) before interest expense (net of interest income), income and franchise taxes and depreciation and amortization (including amortization of capitalized subscriber acquisition costs), further adjusted to exclude the effects of certain contract sales to third parties, non-capitalized subscriber acquisition costs, stock based compensation, and certain unusual, non-cash, non-recurring and other items permitted in certain covenant calculations under the indentures governing our notes and the credit agreement governing our revolving credit facility.

We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about the calculation of, and compliance with, certain financial covenants in the indentures governing our notes and the credit agreement governing our revolving credit facility. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner.

Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.

Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenues.

See the following table for a quantitative reconciliation of Adjusted EBITDA to Net Loss, which we believe is the most comparable financial measure calculated in accordance with GAAP.

APX GROUP HOLDINGS, INC. and SUBSIDIARIES

Reconciliation of Non-GAAP Financial Measures

(In millions)

(Unaudited)

Three Months Ended

March 31,

June 30,

September 30,

December 31,

March 31,

2016

2016

2016

2016

2017

Net loss

$

(45.1

)

$

(89.7

)

$

(70.0

)

$

(71.2

)

$

(82.6

)

Interest expense, net

45.4

47.4

51.8

52.9

53.6

Other (income) expense, net

( 5.1

)

9.9

0.6

2.0

12.0

Income tax expense (benefit)

1.1

( 0.4

)

( 0.1

)

( 0.5

)

0.4

Restructuring and asset impairment (i)

-

( 0.7

)

2.4

( 0.8

)

-

Depreciation and amortization (ii)

33.2

33.4

33.5

33.5

30.0

Amortization of capitalized creation costs

27.4

38.6

43.3

45.6

46.9

Non-capitalized subscriber acquisition costs (iii)

36.0

51.5

45.2

43.3

43.3

Non-cash compensation (iv)

0.4

2.7

0.5

0.5

0.4

Other Adjustments (v)

9.5

12.4

10.8

13.0

11.4

Adjusted EBITDA

$

102.8

$

105.0

$

118.0

$

118.3

$

115.4

i.

Reflects costs associated with the restructuring and asset impairment charges related to the transition of our Wireless Internet business and the 2016 Contract Sales.

ii.

Excludes loan amortization costs that are included in interest expense.

iii.

Reflects subscriber acquisition cost that are expensed as incurred because they are not directly related to the acquisition of specific subscribers. Certain other industry participants purchase subscribers through subscriber contract purchases, and as a result, may capitalize the full cost to purchase these subscribers contracts, as compared to our organic generation of new subscribers, which requires us to expense a portion of our subscriber acquisition costs under GAAP.

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